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How can we reduce health care costs? Employers are leading a transformation

The Healthcare Transformation Alliance, Amazon, Berkshire-Hathaway and JP Morgan, along with Walmart and other national employers have been developing strategies to reduce their costs.


In my prior blogs I have defended the position that there is sufficient money within the healthcare industry today to pay for the services needed for all individuals in the U.S.  We simply spend the money poorly.  The principal cause of poor expenditures is the excess utilization driven by financial incentives.  We perform almost universally two times as many tests and treatments per capita than any other country.  This is not an isolated phenomenon.  It is tonsillectomies, C-sections, MRIs, anything you might name.  The excess utilization drives the existence of too much capacity in the form of facilities and treatment technology.  It also results in too many total providers.

Healthcare providers (e.g. hospitals and physicians) are prepared to move to a new economic model that would incent more appropriate rates of utilization.  However, no organization wants to be the first mover.  Why would I tamp down test and treatment volumes when federal and commercial insurers continue to reward payment for these unnecessary services?  Why would I move to reduce utilization if my organization's financial model, the expectations of my board and my personal incentives drive me to do otherwise?

The federal and state governments pay more than 60 percent of the total healthcare bill in the country.  Use of these funds is defined by the actions of Congress.  Congress recognizes that we have an unsustainable expenditure in healthcare, but they don't focus on costs even though it is fundamentally the issue.  They focus on lack of coverage for the uninsured.  Focusing on cost is too hard and politically uncomfortable.  Focusing on coverage is an effective political wedge issue.  It's important for votes. It's a means to secure substantial funding from lobbyists representing providers, insurers, medical device companies and pharma.  Therefore, each year Congress puts a little bit more money into the old model stifling any real progress toward change.

Healthcare insurers are on a pathway to irrelevance.  Privately they recognize that the administrative costs in the U.S. at 15 percent of total cost is unsustainable.  It's frankly embarrassing that administrative costs in other countries are only 4-5 percent.  None of the excess 10 percent paid to the insurance companies funds any patient care.  The excess dollars fund redundant and unnecessary administrative process and high insurer profits.  Without much public fanfare, the insurers are transforming themselves, becoming providers because they know their current role will not continue in the future.

Private sector employers have expressed increasingly loud concern about their health benefits costs.  They have expected the healthcare industry or Congress to solve their problem.  Their concern has grown over time from anger toward apoplectic rage.  They have decided that neither healthcare providers nor insurers nor the government will solve their problem.  Therefore, they have elected to act.  The Healthcare Transformation Alliance (HTA), Amazon, Berkshire-Hathaway and JP Morgan, along with Walmart and other national employers have been developing strategies to reduce their costs. These strategies are sufficiently developed today that they will soon begin to impact healthcare.  The impact will not be small, it will be transformative.  These employers intend to take direct control over care provided to their employees.  They intend to implement health benefit designs which will fundamentally change the manner in which their employees seek care and from whom they seek that care.

For the most part, hospitals and physicians are unprepared to respond to what is about to impact them from these private sector employer initiatives.  However, the federal government will eventually recognize the employer strategies work for Medicare and Medicaid and they will adapt similar approaches. The combined effect of private employers and the government will result in fundamental transformation of healthcare.

We should soon expect a highly disruptive period where we will hear of significant and sustained failures of healthcare providers, traumatic reduction in total capacity of facilities, technology and providers.  Unfortunately, that is the path that we have chosen. A very painful period will have a better healthcare system with proper incentives and lower costs.